While investors have spent much of 2026 watching artificial intelligence and technology stocks, some of the market’s strongest returns have come from a far less glamorous corner of the economy: oil refining. Marathon Petroleum, Valero Energy and HF Sinclair have each gained more than 80% this year, while Phillips 66 has risen more than 54%, dramatically outperforming the broader market.
The rally is not simply the result of higher oil prices. Refiners do not make most of their money by producing crude oil; they earn money by purchasing crude and converting it into gasoline, diesel, jet fuel and other petroleum products. Their profitability therefore depends heavily on the difference between the cost of crude and the selling price of those finished fuels—a measurement commonly known as the “crack spread.”
That spread has exploded in 2026. The widely followed 3-2-1 crack spread, which estimates the margin from turning three barrels of crude into two barrels of gasoline and one barrel of distillate fuel, reached a record $69.66 per barrel on July 16. Diesel margins surpassed $91 per barrel, while gasoline margins approached $59, levels rarely seen outside periods of severe market disruption.
Several forces have combined to create this unusually profitable environment. The first is a shortage of global refining capacity. The United States entered 2026 with about 18.2 million barrels per day of operable refining capacity, more than 250,000 barrels per day below the previous year. Closures in Houston and Los Angeles removed approximately 400,000 barrels per day of capacity, while Valero also stopped refining operations at its 145,000-barrel-per-day Benicia facility in California during March.
These closures matter because building a major new refinery is extremely expensive, politically difficult and time-consuming. When existing plants shut down, the remaining operators gain more pricing power, particularly when fuel demand remains firm. Marathon, Valero and other large refiners have made small improvements to existing facilities, but those projects have not been large enough to replace the capacity that has disappeared.
Geopolitical disruptions have made the shortage considerably worse. Fighting involving Iran and interruptions through the Strait of Hormuz have reduced fuel exports from the Middle East, while attacks on Russian refining infrastructure and restrictions on Russian diesel exports have tightened international supplies further. Overseas buyers have increasingly turned to American refiners, pushing U.S. refined-product exports to record levels and allowing Gulf Coast plants to operate as critical suppliers to the global market.
American refiners are particularly well positioned because many obtain most of their crude from the United States, Canada and Latin America rather than the Middle East. That provides some insulation from overseas crude disruptions while still allowing the companies to benefit from higher international prices for gasoline, diesel and jet fuel. Marathon reported that its first-quarter refining and marketing margin rose 32.6% from the previous year to $17.74 per barrel, and all four major refiners reported earnings that exceeded analysts’ expectations.
Low inventories have added another layer of support. U.S. gasoline supplies fell by more than 42 million barrels between late February and July 10, reaching their lowest seasonal level since 2012. Diesel inventories also remained below both their February levels and their five-year seasonal average. Refiners have favored diesel and jet fuel because those products currently offer better margins, but that decision has reduced gasoline production during the summer driving season and pushed gasoline prices higher.
The federal government had warned before the current crisis that refinery closures and growing consumption would push combined U.S. inventories of gasoline, distillate and jet fuel toward their lowest year-end level since 2000. Jet-fuel demand was expected to reach a record, while available supply was projected to fall to roughly 21 days of consumption, the lowest level since 1963.
For refiners, this combination is close to ideal: constrained capacity, limited inventories, strong export demand and finished-fuel prices that are rising faster than crude costs. The companies are producing more cash from each barrel they process, giving them greater flexibility to repurchase shares, pay dividends, reduce debt and invest in efficiency projects. Those stronger cash flows have encouraged investors to assign higher valuations to businesses that were previously viewed as mature, cyclical and vulnerable to the energy transition.
The trend could continue through the remainder of 2026, particularly if Middle Eastern and Russian supply disruptions persist. Refinery capacity cannot be replaced quickly, fuel inventories remain unusually low and international customers continue to rely heavily on U.S. exports. Companies with large, efficient Gulf Coast operations may remain especially well positioned because they have access to domestic crude, export terminals and sophisticated facilities capable of producing higher-value fuels.
However, investors should not assume that current profits represent a permanent new normal. Crack spreads are notoriously volatile. Margins could decline rapidly if geopolitical tensions ease, overseas refineries resume production, fuel inventories rebuild or a weakening economy reduces travel, freight and industrial demand. High retail gasoline and diesel prices could also lead to political pressure, regulatory intervention or reduced consumer consumption.
Refiners are also running plants at demanding utilization rates, increasing the risk of mechanical outages and higher maintenance expenses. An unexpected refinery shutdown can prevent a company from benefiting from strong margins precisely when market conditions are most favorable. Phillips 66’s more diversified exposure to chemicals and midstream operations may reduce its dependence on refining, but it can also prevent the stock from responding as directly as more refinery-focused competitors when margins rise.
The most likely outlook is that refining conditions will remain stronger than their historical average but below the extraordinary peaks reached during the current fuel shortage. The structural forces behind the rally—reduced capacity, difficulty building new plants and growing dependence on a smaller number of large refiners—are unlikely to disappear quickly. The war-related portion of the margin expansion, however, could reverse if global trade routes and fuel exports normalize.
That means the stocks may still have support, but future gains are unlikely to come as easily as the first 80%. After such a dramatic rally, investors will increasingly judge Marathon Petroleum, Valero, HF Sinclair and Phillips 66 on whether they can convert today’s exceptional margins into lasting shareholder value before the refining cycle eventually cools.
